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Finding an assumable mortgage is like a dual treasure hunt. As a buyer, you will not only be looking for the right home at the right price, but you’ll also be on an expedition to discover if the seller’s loan is assumable.
But if you succeed in your quest, you can sidestep today’s high mortgage interest rates and secure a monthly payment that could be hundreds of dollars less. Because of these golden benefits, assumable loans are in demand. As one New York Times headline proclaimed, “The Hottest Thing in Real Estate Is a Loan From Two Years Ago.”
Along with the obvious advantage of a lower interest rate, an assumed loan can also come with fewer transaction fees and greater speed.
“Assuming an existing mortgage can also save you on closing costs,” says Eric Broesamle, a top Michigan real estate agent who works with nearly 75% more single-family homes than the average agent in his Mount Clemens market. “There are typically fewer fees involved when you do an assumable mortgage rather than a new origination. Plus, the approval process can be faster.”
In this post, we’ll explain how this often elusive financing option can work for you, and share expert tips on how to find an assumable mortgage attached to a home you want to buy.
What is an assumable mortgage?
An assumable mortgage is a unique arrangement where a homebuyer has the opportunity to take over the seller’s existing mortgage. This type of mortgage is increasingly popular among buyers who wish to benefit from lower interest rates.
In the current real estate market, many sellers listing their homes refinanced their mortgages during historically low pandemic-era rates, when rates fell to an all-time low of 2.65% in January 2021.
Taking on an assumable mortgage can be akin to stepping into a financially advantageous position. Instead of securing a new mortgage with higher rates, a buyer can assume the home seller’s existing interest rate, principal balance, repayment period, and other terms of the lending agreement.
“A lot of people right now are concerned about interest rates,” says Broesamle. “This is a great feature for my clients when they’re looking to purchase a new home, and a lot of them don’t know that this is an option.”
It’s important to note, however, that not every mortgage is assumable. Buyers interested in this option must be aware of certain criteria, qualifications, and fees that can come with assuming a mortgage.
What types of mortgage loans are assumable?
Identifying assumable mortgage loans involves examining the type of loan and its specific conditions. Generally, government-backed or insured loans are the most common assumable loans. Here’s a brief overview of assumable mortgage types:
- FHA Loans: Federal Housing Administration (FHA) loans are often assumable, subject to lender approval. A qualified buyer must meet standard FHA loan requirements, such as a minimum credit score of 580 and a 3.5% down payment.
- VA Loans: Department of Veterans Affairs (VA) loans are usually assumable. According to data from the Government National Mortgage Association (Ginnie Mae), about 90% of all VA homeowners have a mortgage rate below 5% Assumption eligibility includes a minimum 620 credit score and VA approval. Notably, non-veterans can also assume these loans, with the key determinant being creditworthiness. A standard 0.5% VA funding fee is typically applied.
- USDA Loans: Assumable under certain conditions, United States Department of Agriculture (USDA) loans typically require lender and USDA approval. The assumption often results in a new interest rate and terms, although exceptions exist, such as in family transfers where the original rate and terms may be retained without the borrower meeting all the eligibility requirements.
- Some Adjustable-Rate Mortgages (ARMs): While not widespread, certain ARMs can be assumable. In such cases, the new buyer takes over the existing rate and terms. It’s important to note that assuming an ARM may involve relinquishing the option to convert it into a fixed-rate mortgage, and in cases where a conventional ARM loan has been deferred or modified to help the borrower avoid default, the loan is likely not eligible to be assumed.
Conventional loans are typically not assumable
Conventional mortgages, particularly those backed by Fannie Mae and Freddie Mac, are generally not assumable. These loans usually have a “due on sale” or “due on transfer” clause, requiring full repayment when the original borrower sells the home.
However, in certain special circumstances, such as after a death or divorce, some conventional loans may become assumable. For this to be possible, the mortgage contract must include an “assumption clause.” This clause permits the transfer of the loan to another party. Despite this provision, lender approval is still required, and the new borrower must meet the original loan’s eligibility criteria.
How do I find an assumable mortgage?
Finding a home with an assumable mortgage requires a focused approach and patience. It’s not an easy or fast hunt but can be well worth your efforts. Here are some ways to locate these types of listings:
1. Partner with an experienced agent
An experienced real estate agent, particularly one familiar with assumable mortgages, can be invaluable. They often have access to listings and networks that may not be publicly available, and can identify homes with assumable mortgages more efficiently.
“Finding the property initially is probably the most important part — your agent can search for listings with assumable loans,” says Broesamle, who’s been helping home shoppers for more than 22 years. “Once you find the home you like, you need to reach out and talk to the seller’s agent and work with the seller in order to find out who their loan company is to make sure that you can assume the loan.”
2. Search real estate websites using keywords
Interest in assumable mortgages has spiked in many parts of the county. Real estate listing companies like Redfin and Zillow have seen a steep rise in the number of home listings touting the availability of assumable mortgage loans.
Most real estate listing websites have advanced filtering options that will let you enter keywords into your home search. If the seller or their agent is aware that a loan is assumable, they often include this information in the listing.
Some multiple listing service (MLS) systems also have a built-in field for “Assumable,” which allows you to select this specific filter when running a search.
If a site’s filter does not include an “Assumable” filter option, enter specific keywords like “Assumable mortgage,” “Assumable,” or “Assume.” This method can filter out listings that don’t meet your criteria, narrowing your search to properties with potential assumable loans.
When using major sites like Zillow, the keyword option is located under the “More” menu or the “Advanced Search” tool. You can also try including keywords related to loan types that you know are assumable, such as “VA loan,” “FHA loan,” or “USDA loan.” On some sites, loan-type information can be found in the “Mortgage History” section of a listing.
However, there will be other homes on the market with assumable loans that will not appear on a standard keyword search.
3. Use assumable loan websites and online services
There are modern websites and online services dedicated to finding home listings with assumable mortgages. These platforms are specifically designed to connect buyers with sellers offering assumable loans, making them a focused resource in your search.
Here are a few examples of regional websites that break out assumable mortgage listings:
What is Roam (withroam.com)?
A recent real estate services startup called Roam is making the search even more convenient. The company specializes in identifying home listings with low-interest-rate assumable mortgages.
According to the company’s founder, Raunaq Singh, Roam is the first real estate service to provide a data feed exclusively made up of homes eligible for loan assumption. The company’s website homepage touts, “Assuming a 2% mortgage could cut your monthly payments in half.”
Because Roam is a licensed real estate broker and a member of multiple listing services, they have access to all the same listings a traditional real estate agent can view. The service cross-references mortgage data with public records to compare and locate homes for sale that are financed by assumable FHA or VA loans. (Roam currently does not include USDA loan listings in its coverage area.)
The cost to use Roam is 1% of the property’s sale price. So on a home that sells for $400,000, you’ll pay $4,000, an amount you might make up in a matter of months from the money you can save on monthly payments with a low interest rate assumption. Roam currently operates in select areas of Georgia, Colorado, Arizona, Texas, and Florida.
Service fees and locations can change. Check Roam’s FAQ page for updates.
There are also specialized consulting and list firms, such as Assumption Solutions and Take List, that help homebuyers, sellers, and their agents complete a successful mortgage assumption. For a fee, these companies will assist with the transfer process or help you find a listing with an assumable loan.
How does an assumable mortgage work?
When assuming a mortgage, the loan balance from the existing borrower is transferred to you, placing the responsibility of the remaining payments on your shoulders. Typically, this entails taking over the original terms set for the previous homeowner, such as the interest rate and monthly payment amounts.
The process is similar to getting a regular mortgage but with some distinct steps. Here’s a general outline:
- Identify a home with an assumable mortgage: First, confirm if the home’s loan is assumable. Contact the homeowner’s lender for permission to assume the loan, a task often handled by a real estate agent if you’re working with one.
- Determine the remaining loan balance: Assess the remaining balance on the seller’s mortgage and how much cash you’ll need for closing. If additional financing is necessary, explore lenders willing to provide it.
- Apply for the loan: Submit an application for the assumable loan. The process and criteria vary by lender, similar to a traditional mortgage application.
- Get lender approval: You’ll need to get approval from the existing lender, demonstrating your ability to take over the mortgage debt.
- Sign an assumption agreement: You’ll sign an assumption contract, officially transferring the mortgage debt responsibility to you.
- Finalize the sale: Complete the necessary paperwork to close the sale. This often includes signing a release that absolves the seller from the original loan’s obligations, a step that’s crucial in VA loan assumptions to prevent the veteran from losing future loan benefits.
- Begin making the loan payments: You will now start making mortgage payments following the existing terms, including the repayment period and interest rate.
Broesamle says you don’t need to walk the assumable mortgage path alone. An experienced agent can be your navigator. “I work with [clients] with our inside lender to make the process as easy as I can. I have them speak to the lender or give them a foreshadowing of events to expect during the process, and the things that they’re going to get in order to complete the process.”
Be prepared to pay the seller their equity
You will need to compensate the seller for the equity they’ve earned, which is a combination of the home’s natural appreciation and what they have already paid off on their original loan. As part of the purchase price, these funds can come from your savings or be financed through a separate loan.
For example, if you buy a $450,000 house from a seller who has an outstanding mortgage balance of $250,000, they have $200,000 worth of equity stake that belongs to them. You will need to pay the seller that $200,000 when you close the sale.
Pros and cons of assumable mortgages
Assumable mortgages come with distinct advantages and disadvantages, important to consider before proceeding.
Pros of assumable mortgages
- Lower interest rate: Assumable mortgages often offer lower interest rates compared to current market rates, potentially leading to significant savings over the loan’s lifespan.
- Reduced out-of-pocket costs: Homes with low equity can mean less cash needed at closing, reducing initial expenses.
- No need to shop for mortgages: This process eliminates the need to compare lenders, streamlining the mortgage acquisition. Even if financing the seller’s equity is necessary, it’s often easier to qualify for this smaller, separate loan.
- Appraisal may be optional: While an independent appraisal is still advisable, it’s often not a requirement in mortgage assumption, possibly saving time and money.
Cons of assumable mortgages
- Substantial cash may be required: If the seller has significant equity or the property’s value greatly exceeds the mortgage balance, you might need a considerable sum to cover their equity. Additionally, some lenders may be reluctant to finance a second mortgage.
- Limited availability: Assumable mortgages are less common, which can restrict your home-buying options.
- Fixed loan terms: You’re bound to the existing terms and conditions of the seller’s mortgage, which can limit your flexibility in loan negotiation.
- Risk of financial strain: Managing two mortgages (if additional financing is needed) increases the risk of default.
- Challenging loan approval process: The approval process can be stringent, with lenders enforcing strict qualification criteria. For government-insured loans, agency approval is also required.
While there are some challenges to navigate, Broesamle believes the pros can outweigh the cons for hopeful buyers feeling sidelined by high monthly mortgage payments.
“It’s a great value to take advantage of this with the high interest rates we have now,” he says. “Because if you can get the loan assumed, you know, you’re going to save yourself up to 50% in a rate because rates right now are upwards of 7%. If you can take advantage of that program, you’re going to save yourself a ton of money.”
Seller pro and con
Pro: As a seller, offering an assumable mortgage can help your home sell faster. It provides buyers with a streamlined process and typically a loan lower interest rate.
Con: A seller can face financial risks when allowing a buyer to assume their mortgage, especially with VA loans. We’ll explain below.
If my loan is assumed, am I fully clear of the debt?
As a seller, if your mortgage is assumed by someone else, that does not mean you are fully relieved of the debt repayment. You may still be responsible for covering any payments that the new loan holder fails to pay. You can be held liable for the default payments, which could impact your credit rating.
This risk is compounded if you allow a buyer to assume your VA loan. If they miss payments, it could make you ineligible to use your VA loan benefit on a future purchase. To avoid forfeiting your eligibility, be certain you contact your lender early in the process to see if you can be released from liability. This involves VA loan entitlement considerations. The lender must approve the release request.
Is it difficult to qualify for an assumable mortgage?
The qualification process for an assumable mortgage mirrors that of a traditional mortgage in many ways. Lenders evaluate factors such as your credit score, debt-to-income ratio (DTI), and overall financial health to determine your reliability as a borrower. Necessary documentation typically includes proof of income, identification, and possibly your employment history.
Fulfilling these criteria is essential for gaining lender approval, though the exact requirements may differ. Seeking advice from a mortgage professional can be beneficial in understanding the process and locating a suitable lender for your home-buying journey.
How much does it cost to assume a home mortgage?
Assuming a mortgage incurs various expenses, similar to acquiring a new mortgage. These can include fees for real estate agents, down payments, closing costs, and inspection fees.
A unique cost in this process is the assumption fee, which varies based on the lender’s policy, the investor behind the mortgage, and state regulations. This fee is typically a percentage of the unpaid principal or a fixed amount.
For VA loans, an additional VA funding fee, usually 0.5% of the loan balance, may apply. Exceptions exist, notably for VA disability beneficiaries, active-duty Purple Heart recipients, and surviving spouses eligible for Dependency and Indemnity Compensation (DIC). It’s advisable to consult with your lender for a detailed breakdown of the costs associated with mortgage assumption.
Is assuming a mortgage possible after someone’s death?
Mortgage assumption is an option when inheriting a home from a deceased family member. This is often feasible even in the absence of an assumption clause or for conventional loans. Typically, in cases of inheritance, the new borrower may not need to fulfill all standard qualification criteria if they were related to the deceased.
Can a mortgage be assumed post-divorce?
In a divorce scenario, if one spouse is granted full ownership of the property, they can usually assume the existing mortgage. The lender will assess their financial situation, including income, assets, and creditworthiness, to verify their ability to maintain the mortgage payments. Seeking guidance from a home loan expert is beneficial for smoothly managing the assumption process in such circumstances.
Should I consider assuming a mortgage?
Assuming a mortgage can be beneficial, especially if the home you are purchasing has a favorable interest rate, offering potential savings in time and money. However, this option has its own set of limitations and considerations.
HomeLight can connect you with a knowledgeable real estate agent in your area for guidance in finding properties with assumable mortgages. Additionally, consulting with a real estate attorney is recommended when exploring the possibility of an assumable mortgage.
While there are risks and challenges involved, assumable mortgages are a creative solution to rising borrowing costs. The hunt takes planning, patience, and effort, but you may walk away with a treasured home at an interest rate that makes home affordability a dream come true.
Header Source: (Johnson Johnson / Unsplash)
- "The Hottest Thing in Real Estate Is a Loan From Two Years Ago," The New York Times, Conor Dougherty (June 2023)
- "Historical Mortgage Rates: See Averages and Trends by Decade," U.S. News, Erika Giovanetti (September 2023)
- "How assumable loans could help homebuyers in the DMV avoid high mortgage rates," FOX 5, FOX 5 DC Digital Team (August 2023)
- "New Company Promises Half-Price Mortgage Rates," Newsweek, Omar Mohammed (September 2023)